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Monday, March 8, 2004

Bombardier Considers Building Larger Regional Jet

The Question Is How Big The Next Plane Should Be, Not If It Should Be Built

Not wanting to concede ground to archrival Embraer [ERJ], Canada's Bombardier [BBD] has embarked on a year-long assessment of whether it should build a new class of regional jets.

Current market analysis indicates a strong demand for jets larger than 100 seats. In fact, Bombardier may be able to leapfrog Embraer by building a state-of-the-art jet that can lure airlines away from the aging low-end designs of Boeing [BA] and Airbus.

Bombardier needs $1.5 billion to fund the research and development of a new aircraft family. The Montreal-based firm has already said it will ask the Canadian government to fund a quarter of the costs. As a fall back, Bombardier has said it was open to assembling the new jet in its Belfast, Northern Ireland, facility if the British government provided development funds. At the moment, all its regional jets are assembled in Montreal.

While Bombardier estimates it will cost $1.5 billion to bring a new jet to production, Embraer reports that it spent $1 billion to develop its Embraer 170/190 family. The Brazilian manufacturer said the entire tab was financed by the firm and its sub-assembly partners. No government funds - no grants, loans or tax credits - were used, said Henrique Rzezinski, Embraer's executive vice president for corporate affairs.

By comparison, Boeing anticipates spending at least $6 billion to develop the B7E7 and Airbus expects to spend $10.7 billion to bring the A380 to market.

Bombardier has hired Gary R. Scott away from CAE, a Canadian manufacturer of trainingsimulators,to lead the study team as the president of the new commercial aircraft program. He had leadership positions at Boeing that included the launch of the B737 Next Generation and B757-300. A decision to move ahead with a new plane will be made early next year, said John Paul Macdonald, a Bombardier spokesman. He estimated it would take four to five years to design, build, test and certify a new plane.

The Bombardier engineers will not be stretching its current family. The CRJ700, which seats 70, is a stretched version of its 50-seat CRJ200. The CRJ900, which seats 86, is a double stretch of the CRJ200. In the late 1990s, Bombardier had plans for a larger regional jet that was not based on the CRJ200 model. Dubbed the BRJ-X, the project was canceled in 2000, because the company did not believe there was a market for a 100-seat jet. Macdonald said the company would not be going back to the BRJ-X designs.

"We are not interested in putting out another 100-seat aircraft for the sake of doing so," Macdonald told CRAN. "A decision to go forward will based on the belief our new product will give our customers a 15 to 20 percent cost savings in terms of operating costs. It will be a new generation of commercial aircraft so that we will pretty much be leapfrogging over the competition."

In fact, Bombardier will explore developing a family of jets that could carry 110 to 130 passengers. A plane in this range could be attractive to both the regional and mainline airlines.

According to Back Aviation Solutions, Bombardier is having a harder time selling the CRJ900 than Embraer is with its slightly larger plane. There are 16 CRJ900s in service with another 40 on order.

As Embraer is about to begin delivery of the first Embraer 170, which seats 70 to 78 passengers, it has sold 110 of its Embraer 190, which can seat 94 to 106. It expects to begin delivering the Embraer 190 next year. The larger Embraer 195, which can carry 108 to 118, will begin deliveries in 2006. Embraer already has 15 firm orders for this plane.

Embraer's Rzezinski said his firm does not have any plans to build a plane larger than the Embraer 195. "Our strategy is to go exactly to that niche. We think it is very important niche. We believe 110 is the ceiling of that niche. We are not in competition with the big ones [Boeing and Airbus]. Within the Embraer family you go up until that point. If you are Boeing or Airbus, it makes sense to go down to that edge. I don't think it is about to overlap."

If Bombardier decided to build a new regional jet that mirrors the Embraer family in seating capacity, two widely varying estimates indicate there will be a market for the new line. The market potential - and the competition - increases if Bombardier decides to be more aggressive with its design.

  • A 2000 analysis by AvStat found a 20-year world demand of 2,339 planes that could carry 80 to 110 passengers.
  • A more recent study by Forecast International found a market potential of about 650 aircraft between 2004 and 2012. This study zeroed in on a plane that could seat 90 to 110.
  • A study by Back Aviation found a need for 2,282 new planes between now and 2013. This analysis was based on the 60-seat to 120-seat segment. However, it found that another 1,764 new planes will be needed that can carry 120 to 139 passengers.
  • An aerospace and defense electronics industry report recently released by Prudential refers to an internal Embraer study that sees a need for more than 1,500 new jets by 2020. The study focused on the 90- to 120-seat market. Furthermore, Embraer found that 47 percent of the U.S. departures could be more effectively handled by planes in this segment.

When Bombardier last considered the 100-seat BRJ-X, Doug Abbey, president of AvStat, said he had concerns, and he still does. "Launching a new aircraft type that is not a family presents a very risky proposition to any manufacturer," he said.

"It is such an uncertain environment. If they should embark on a program by the end of the year and come out in five to six years, who knows what kind of cycle the industry will be in, who knows where [pilot's] scope [clauses] will be, how consolidation will have shaken out? Ultimately, any aircraft will have to be justified on the basis of economics, it has to be a demonstrable improvement over what is available."

The market niche - regional, mainlines or an overlap - also needs to be carefully assessed, Abbey said. He sees a 50-50 chance that Bombardier will go ahead with a new plane. "Building a 100-seater is a risky proposition, which is why Bombardier has been looking at it so long."

Fred Klein, with the consulting firm of Aviation Specialists, said Bombardier has little choice but to move forward. "Embraer has a head start on Bombardier, which will make it more difficult. But if Bombardier wants to remain a regional airline power as it has been for quite some time, it has to have a product in that size."

Klein noted that the major carriers now want their regional partners to fly an aircraft that resembles a mainline jet. "They don't want their passengers getting on a twin- engine turboprop coming in from Podunk." He said Bombardier's current family of small jets does not meet this test.

"They got gun shy," said Bill Dane, an analyst with Forecast International, when they canceled the BRJ-X. "If they want to stay a player and compete with Embraer, they need to put their best foot forward."

Dane suggested that the new Bombardier be a 110-seat plane that can be stretched to 120 or 125. "Anything smaller is too close to their 90-seater."

While all the projections note a large market potential for the 100-seat-plus plane, Embraer has the market to themselves for the moment. Chinese and Russian aerospace firms plan to launch their own regional jets in 2007, said Tulinda Larsen, a managing director at Back Aviation. Both nations plan a 70-seat and a 100-seat model and, while both envision domestic sales, each also plans international sales. (The Chinese project's price tag will be 20 percent less than those built in the West.)

Thus, by the time Bombardier rolls out its new plane in 2009, Larsen said, there will be four firms competing for the sales.

The real opportunity for Bombardier would be to leapfrog the others, Larsen said. Just as the Embraer 170 family employs advanced technology first used on the B777, Larsen said the newest Bombardier needs to employ the latest in avionics and composites. The plane should be 20 percent more efficient to fly, set new standards in emissions and noise controls and be able to handle transcontinental routes. "They could really be leading the cusp on the next generation of aircraft," she said.

The larger the plane, the greater the likelihood of direct competition with Boeing and Airbus. Both firms market aircraft in the100-seat niche. The B717 seats 106 to 117 passengers. The A318 carries 107 to 117 passengers.

While Airbus can stress commonalty in the A320 family, Boeing can't say the same thing because the B717 was originally the MD-95. Dane said Boeing has only 36 orders for the "redheaded, stepson." Airbus, he said, reports 70 A318s on back-order.

Larsen told CRAN that Bombardier has the opportunity to take sales away from the B717 and the A318 because neither plane employs state-of-the art avionics and there are no plans to upgrade or replace these models with more advanced planes. Both the B717 and A318 are built as mainline aircraft and are thus heavier than the new Embraers.

Larsen said the pending retirement of DC-9s and old B737s gives Bombardier an opening to sell a larger plane to the mainline carriers. The current B737-600s carry 108 to 130 passengers while the A319 carries 124 to 134 passengers. The new Bombardier, she said, would be technically more advanced than either the Boeing or Airbus model for the foreseeable future.

While not minimizing the potential competition from Boeing and Airbus, Larsen said Bombardier could offer a product line with jets that can carry from 40 to 140 seats. "Embraer, the Chinese and Russians don't have that."

Others were not as aggressive with their advice. Taking on Boeing and Airbus would be "murderous," Dane said.

"There is [a] risk of a regional manufacturer going up against Boeing and Airbus," Abbey said. "We are moving to the place that Bombardier and Embraer are clearly forces to be reckoned with in the global aerospace industry. But Boeing and Airbus are considerably larger than Bombardier and Embraer. The notion that the B717 and A318 exist despite lackluster sales indicates they are not ready to give this niche up to the upstarts."

>>Contact: John Paul Macdonald, Bombardier, (514) 855- 7972; Henrique Rzezinski, Embraer, 55 123 927 2267; Doug Abbey, AvStat, (202) 338-1727; Fred Klein, Aviation Specialists, (703) 736-9700; Bill Dane, Forecast International, (203) 426-0800; Tulinda Larsen, Back Aviation Solutions, (202) 783-5052.<<

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